Sunday, June 22, 2008

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Stagflation Impact on Singapore Property Market

There is a strong argument that with inflation, building costs have gone up significantly and one would therefore expect, property price to rise too.

If inflation occurs at a time of strong economic growth, one'd expect that argument to be true. But acute inflation coupled by slow economic growth or even recession (now widely known as STAGFLATION) is quite another question.

Stagflation shaves consumers' spending power on both ends: Decrease earnings on one end with slowing economic growth and increase expenditures with soaring food and fuel prices on the other end.

In a situation like that, a rational consumer is likely to channel his limited resources to essentials and cut his spendings on luxuries. It's quite apparent that the property market will be the first and hardest hit if Singapore enters into a stagflation.

NTUC Chief Lim Swee Say has warned that stagflation is the worst case scenario Singapore can face at this time, reported the media yesterday. "Jobs will be lost and wages will stagnate", he pointed out the threat posed.

A forumer expressed his concern about the impact of stagflation on the Singapore property Market,
"Now it's not about demand and supply (in the Singapore property market) anymore. It's about the threat of STAGFLATION to the world, and especially to the tiny economy of Singapore. Come retrenchments, pay freeze and foreigners selling their properties and going home; we'll see more and more people who simply cannot hold on to their properties, especially with banks tightening on borrowings etc.. "

How probable is stagflation here in Singapore?

Let's look at oil price.

Why the surge in oil price ?
G8 has been asking for OPEC to increase supply. OPEC has been blaming the speculators. But really, there are fundamentals that are driving oil price up to its current record high level.

Demand Fundamental: Increase affluence in emerging economies have increased the demand for oil. And who's to say emerging economies are not entitled to the modern livings that the developed countries have been enjoying for a long time?

Supply Fundamental: Firstly, wars in some oil producing countries like Nigeria and Iraq continued to disrupt the supply of oil. Now, there's the added threat of a war in Iran. Secondly, there have been few oil explorations in the past few years and it will take years to have supplies coming from new oil fields. Finally, oil is, as we've been taught in elementary schools, a non-renewable scarce resource. These factors will put limits to how much supply can be increased.

The reality is that we're living in a global economy powered by oil. If oil price continues to remain at the $130 level, it's enough to bring the global economy to its knees. Yet, we've been told that oil price is likely to surge to $200 level. In many countries, oil is still subsidised but as oil price continues to surge, it'd put more and more pressure on the government to remove these subsidies. The inflationary effects will be more and more apparent as these subsides are removed.

Singapore is just a small boat tossing in the seas of the world's economic tsunami. It has to import everything it needs and obviously has no control over inflation. In fact, the Singapore government would its people to see inflation, especially the soaring oil price, as the market determines it; so Singaporeans would not be misguided in any way. Indeed, the threat of stagflation is very real to the small and open economy of Singapore.

May also want to read:
Singapore Property Forum
History of Singapore Property 1960 to 2008
Buy or Not Buy: How to decide amid mixed market signals
Property Price Index Graph Plotter & Online Property Valuation


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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

Smart Buyer :)